Last month Citi, typically known as an IT innovator in the financial services world, announced it is to replace its aging legacy core banking system with another mainframe-based batch system. Because of the relatively large number of mainframe solutions specific to the US market, and a host of outsourced solutions that also run on the mainframe, perhaps I shouldn’t be surprised. But generally speaking, banks in other mature markets are recognizing that they suffer from inflexible batch systems and are rapidly approaching a “skills cliff” of appropriately skilled and priced resources in COBOL and CICS. Furthermore, banks remaining on batch based systems typically also suffer from lower efficiency ratios that those on modern real-time systems.
Drivers for Real-time
Progressive banks in Europe and Asia are starting to recognize that the back office also profoundly impacts the customer experience. I’m not just talking about the risk of long-running outages of batch systems that were identified in the March 2010 report from Bob Hunt at TowerGroup. On a day to day basis, transaction processing excellence for retail and corporate clients alike is as big a contributor to customer satisfaction as any traditional client-facing initiatives. As a result, Microsoft sees technology renewal projects in any part of a bank being considered with three factors in mind: cost, operational control, and the impact on customer experience. This is driving the move to real-time systems based on a modular architecture, such as from Microsoft’s strategic partner, Temenos.
Influence of Foreign Banks
To see beyond the US penchant for batch systems, we need to consider the number of US banks owned by overseas institutions such as BMO and TD Bank from Canada, and Santander, HSBC and BBVA from Europe. Over time, the playing field in the US market has changed, and the homogeneity of mainframe solutions at US-owned banks may start to become a greater disadvantage. My view is that overseas-owned banks in the US will be in the vanguard of larger institutions moving to real-time core systems, therefore raising the bar on (lower) efficiency ratios and more agile product development. It will be interesting to see what operational pressures the traditional mainframe, batch-based banks find themselves under in the next 5-10 years based on domestic competition from foreign banks.